Reducing exposure to Bank of America

GregTroccoli

On Wednesday, we wrote about our favorite play on a housing recovery, which was to be long Bank of America. We wanted to alert readers that on Thursday, even though BAC is considered a strong buy, our countertrend reading generated an “approaching overbought” level.

Our members have owned this name since September in the mid $8 and should be reducing 50% of their exposure to this name. Remember, Bank of America
BAC, -0.17%
is not yet overbought, and we will reduce 100% exposure to the stock if and when we get an overbought reading.

We expect the fundamental story to stay in tack for 2013, and we remain bullish on it; however, we are first and foremost about price. For those who are not familiar with our methodology, we do not use the typical RSI (Relative Strength Index) for overbought and oversold levels. RSI is flawed and often provides many false signals.

We also like to look at the standard deviation above or below a specific time frame; in this case, we use the 50-day moving average. Even though looking at the standard deviation is not as accurate as our countertrend reading, it does provide us a nice visual comparing industry peers overbought and oversold level on a relative basis.

Any security with a reading of 3.5 standard deviations over/under the 50-day moving average starts to present unsustainable price levels. Often when you have a stock that has extended at unsustainable levels, the risk of reverting to the mean is great with even a small catalyst. As you can see from the image linked above, BAC is about 2.50 STD above the 50-day MA.

Also on the link above, we have a graph that represents the strongest 20 names within the S&P 500 as of this morning. We like to defer to the strongest 20 names within the S&P 500, as it provides a good high level of sector rotation.

As you can see from the top part of the image, we show the five-day trend for each sector. You will notice that 30% of the top 20 names are represented by financials. Bank of America has been on the list for the last several weeks. Additional financial names include: The Hartford, Invesco, JPMorgan, Plum Creek Timber and ProLogis. The average duration for these six names staying at a strong buy is 29 days

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